What are Sustainable Bonds?

The first sustainable bond was launched in 2007 by the European Investment Bank and since then sustainable bonds have played a significant role in scaling up the financing of investments that provide environmental and social benefits and attracting private investors to supplement the funding available from governments to pursue the ambitious public policy initiatives mentioned above.? Sustainable bonds are generally broken out into two main categories: Sustainability-Linked Bonds, which have been described as any type of ?instrument for which the financial or structural characteristics can vary depending on whether the issuer achieves predefined sustainability objectives, and use-of-proceeds (“UoP”) bonds, which have been described as any type of instrument where the net proceeds (or an equivalent amount to the net proceeds) are exclusively used to finance or refinance, in part or in full, new and/or existing eligible green and/or social projects.[1]? Three important subcategories of use-of-proceeds instruments include:

• Green Bonds: Instruments that raise funds for projects with environmental benefits including renewable energy, green buildings, and sustainable agriculture.
• Social Bonds: Instruments that raise funds for projects that address or mitigate a specific social issue and/or seek to achieve positive social outcomes, such as improving food security and access to education, health care, and financing, especially but not exclusively for target populations.
• Sustainability Bonds: Instruments that raise funds for projects with both environmental and social benefits.

As the market for sustainability bonds matures, diversity can be expected and new bonds will be issued that fall outside the conventional categories described above.? For example, another type of sustainability bond that has recently emerged is referred to as a Transition Bond, which can either be Sustainability-Linked or use-of-proceeds bonds and which are issued specifically to support climate transition goals, geared toward issuers in hard-to-abate sectors.? Transition Bonds aim at supporting climate transition, but the projects that they support may not always be “green”.[2]? In addition, 2019 saw the issuance of the first Blue Bond, with are bonds issued with the objective of emphasizing the importance of the sustainable use of maritime resources and of the promotion of related sustainable economic activities.[3]? S&P Global Ratings has predicted that both Transition and Blue Bonds are poised for growth in 2024 and beyond.[4]

Development of a global framework for the sustainable bond market has been spearheaded by the International Capital Market Association (“ICMA”), a self-regulatory organization and trade association for participants in the capital markets that seeks to promote the development of the international capital and securities markets, pioneering the rules, principles and recommendations which have laid the foundations for their successful operation.? ICMA focuses on a comprehensive range of market practice and regulatory issues which impact all aspects of international market functioning and prioritizes three core fixed income market areas—primary, secondary, repo and collateral: with two cross-cutting themes of sustainable finance and FinTech and digitalization.[5] Notably, the ICMA has championed a suite of voluntary process guidelines that recommend transparency, disclosure and integrity in the development of the sustainable bond market and the issuance and use of proceeds of sustainable bonds: the Green Bond Principles, Social Bond Principles, Sustainability Bond Guidelines and Sustainability-Linked Bond Principles.

Estimates of the size and composition of the global sustainability market vary.? For example, according to data available in the ICMA’s Sustainable Bond Market Database[6], USD 764.1 billion in sustainable bonds were issued worldwide in 2023, slightly lower than 2022 (USD 803.9 billion) and significantly lower than 2021 (USD 1,044.1 billion).? Green Bonds accounted for the largest portion of issuances in 2023 (USD 425 billion), followed by Sustainability Bonds (USD 153.8 billion), Social Bonds (USD 129.4 billion) and Sustainability-Linked Bonds (USD 55.9 billion).? As noted above, the first sustainable bond came out of Europe and European issuers have continued to dominate the market since then.? ICMA reported that just under half of the USD amount of sustainable bonds issued in 2023 came from Europe (USD 381.7 billion, or 49.9%), followed by Asia (USD 184.7 billion, or 24.2%), Supranationals (USD 81.5 billion, or 10.7%), North America (USD 74.9 billion, or 9.8%) and South America (USD 30.4 billion, or 4%).? Europe’s share of the sustainable bond market (49.9%) declined slightly from its level in 2021 (55%) while Asia’s share rose significantly from 12.5% in 2021 to 24.2% in 2023.

According to data from Environmental Finance (“EF”) Bond Database of global sustainability bond issuance for nonfinancial corporates, sovereigns, financial institutions, and international public finance, issuances of sustainable bonds in 2023 grew 6% to more than USD 980 billion?from USD 925 billion in 2022, and the breakdown among categories was as follows: Green Bonds 59%, Social Bonds 18%, Sustainability Bonds 16% and Sustainability-Linked Bonds 7%.[7]? Green Bond issuances expanded 10% year on year in 2023, but issuances of both Social and Sustainability Bonds was flat and issuances of Sustainability-Linked Bonds declined for the second year in a row amid concerns regarding their efficacy.? S&P Global Ratings noted that drivers of growth for the sustainability bond market have included increased adoption of government-sponsored sustainable taxonomies and transparency initiatives[8], growth in issuance from emerging markets, and efforts to accelerate the energy transition and decarbonize regional economies; however, the market still needed to contend with challenges such as high interest rates and the possibility of economic slowdowns in important areas such as Europe and Asia (Asia has doubled its share of sustainability bond issuances since 2020).[9] ?Using the EF data, S&P Global Ratings projected that new issuances of sustainable bonds would increase modestly to a range of USD 950 billion to USD 1.05 trillion in 2024 and that sustainability bonds could represent 12% to 14% of total bond issuances in 2024, a striking rise from 5% in 2019.[10]

Green Bonds

Green Bonds have been described as including any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible green projects (e.g., funding new and existing mortgages for energy efficient residential buildings in Norway).[11]? As the data referred to above indicates, Green Bonds is by far the largest segment among the various sustainability bonds and target projects relating to a number of themes included in the SDGs such as climate mitigation involved in the reduction of carbon; clean water and sanitation (SDG6); affordable and clean energy (SDG7), buildings and transport (SDG9); city infrastructure (e.g., low carbon buildings and transport (SDG11) and agriculture (SDG15).? Although they are popular, some have expressed doubts about their impact.? For example, in September 2020, The Economist reported on a study by the Bank for International Settlements of over 200 issuances of Green Bonds by larger companies from 2015 to 2018 and noted that the evidence appeared to be that the issuances did not seem to lead to de-carbonization and that the Green Bond marketplace did not significantly lower the cost of borrowing.[12]?

Influential principles or guidelines relating to the issuance of Green Bonds include the ICMA’s Green Bond Principles: Voluntary Process Guidelines for Issuing Green Bonds (“GBP”), the CBI Taxonomy, IFC Climate definitions, and the EU Green Bond Standard/Taxonomy.[13] ?The GBP is intended to promote integrity in the Green Bond market through guidelines that recommend transparency, disclosure and reporting.? It is anticipated that setting the structure and terms of Green Bonds in alignment with the GBP will provide the underlying investment opportunity with transparent “green credentials” and that widespread adoption of the GBP will ultimately increase capital allocation to green projects.? The ICMA has noted that the GBP are collaborative and consultative in nature based on the contributions of members and observers of the GBPs and Social Bond Principles (discussed below), and of the wider community of stakeholders. ?The GBP are updated periodically to reflect the development and growth of the global Green Bond market and reference should be made to ICMA website for the most current version and related guidance.? The discussion below is based on the version of the GBP in effect as of the date this Work was published (see below).[14]

The GBP define Green Bonds as “any type of bond instrument where the proceeds or an equivalent amount will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible Green Projects and which are aligned with the four core components of the GBP”.? The GBP recognized four types of Green Bonds, noting that additional types may emerge as the market develops[15]:

• Standard Green Use of Proceeds Bond: an unsecured debt obligation with full recourse-to-the-issuer only and aligned with the GBP.
• Green Revenue Bond: a non-recourse-to-the-issuer debt obligation aligned with the GBP in which the credit exposure in the bond is to the pledged cash flows of the revenue streams, fees, taxes etc., and whose use of proceeds go to related or unrelated Green Project(s).
• Green Project Bond: a project bond for a single or multiple Green Project(s) for which the investor has direct exposure to the risk of the project(s) with or without potential recourse to the issuer, and that is aligned with the GBP.
• Secured Green Bond: a secured bond where the net proceeds will be exclusively applied to finance or refinance either: (i) the Green Project(s) securing the specific bond only (a “Secured Green Collateral Bond”); or (ii) the Green Project(s) of the issuer, originator or sponsor, where such Green Projects may or may not be securing the specific bond in whole or in part (a “Secured Green Standard Bond”).

The GBP explicitly recognize several broad categories of eligibility for Green Projects based on their contribution to environmental objectives including climate change mitigation, climate change adaptation, natural resource conservation, biodiversity conservation and pollution prevention and control.? These categories include, but are not limited to, the following[16]:?

• Renewable energy (including production, transmission, appliances and products);
• Energy efficiency (such as in new and refurbished buildings, energy storage, district heating, smart grids, appliances and products);
• Pollution prevention and control (including reduction of air emissions, greenhouse gas control, soil remediation, waste prevention, waste reduction, waste recycling and energy/ emission-efficient waste to energy);
• Environmentally sustainable management of living natural resources and land use (including environmentally sustainable agriculture; environmentally sustainable animal husbandry; climate smart farm inputs such as biological crop protection or drip-irrigation; environmentally sustainable fishery and aquaculture; environmentally sustainable forestry, including afforestation or reforestation, and preservation or restoration of natural landscapes);
• Terrestrial and aquatic biodiversity conservation (including the protection of coastal, marine and watershed environments);
• Clean transportation (such as electric, hybrid, public, rail, non-motorized, multi-modal transportation, infrastructure for clean energy vehicles and reduction of harmful emissions);
• Sustainable water and wastewater management (including sustainable infrastructure for clean and/or drinking water, wastewater treatment, sustainable urban drainage systems and river training and other forms of flooding mitigation);
• Climate change adaptation (including efforts to make infrastructure more resilient to impacts of climate change, as well as information support systems, such as climate observation and early warning systems);
• Circular economy adapted products, production technologies and processes (such as the design and introduction of reusable, recyclable and refurbished materials, components and products; circular tools and services); and/or certified eco-efficient products; and
• Green buildings that meet regional, national or internationally recognized standards or certifications for environmental performance.

The four components of the GBP are as follows:

• Use of Proceeds: The GBP explains that the cornerstone of a Green Bond is utilization of the proceeds of the bond for Green Projects, which should be appropriately described in the legal documentation for the security.? The GBP requires that all designated Green Projects provide clear environmental benefits, which will be assessed and, where feasible, quantified by the issuer.
• Process for Project Evaluation and Selection: The issuer of a Green Bond should clearly communicate to investors: the environmental sustainability objectives; the process by which the issuer determines how the projects fit within the eligible Green Project categories identified above; and the related eligibility criteria, including, if applicable, exclusion criteria or any other process applied to identify and manage potentially material environmental and social risks associated with the projects.
• Management of Proceeds: The net proceeds of the Green Bond, or an amount equal to these net proceeds, should be credited to a sub-account, moved to a sub-portfolio or otherwise tracked by the issuer in an appropriate manner, and attested to by the issuer in a formal internal process linked to the issuer’s lending and investment operations for Green Projects.
• Reporting: Issuers should make, and keep, readily available up to date information on the use of proceeds to be renewed annually until full allocation, and on a timely basis in case of material developments. The annual report should include a list of the projects to which Green Bond proceeds have been allocated, as well as a brief description of the projects and the amounts allocated, and their expected impact.

The GBP includes a recommendation to issuers of Green Bonds that they select and appoint external review providers to confirm the alignment of their Green Bond or bond program with the four components of the GBP.? The GBP noted that issuers could seek advice from consultants and/or institutions with recognized expertise in environmental sustainability or other aspects of the issuance of a Green Bond and commission one of more of the various types of independent external reviews that are offered in the marketplace including second party opinions, verification, certification and/or Green Bond scoring/rating.? The GBP recommends public disclosure of external reviews that include disclosures of the credentials and relevant expertise of the external review provider and the scope of the review conducted.

Blue Bonds

Blue Bonds, sometimes described as a subset of Green Bond, are used to fund projects or activities that are water-related including management and restoration of water ecosystems (e.g., oceans, rivers etc.), sustainable fisheries, seafood processing/shipping, sustainable tourism, and sustainable water supply.[17]? Influential principles or guidelines relating to the issuance of Blue Bonds include the GBP, the ICMA Blue Bond Practitioner’s Guide, the CBI Taxonomy, IFC Blue Finance Taxonomy, and the UN Global Compact Practical Guidance to Issue a Blue Bond.[18]

Social Bonds

The proceeds of Social Bonds are used for new and existing projects with positive social outcomes (e.g., to finance or refinance loans granted to clients whose activities contribute to local economic development across the employment conservation and creation category).[19]? Social Bonds provide capital for addressing issues in underserved or underprivileged sectors such as affordable housing, education, vocational training and microfinancing, and are recognized as suitable for use in enabling, developing and implementing new and existing projects with a positive social outcome for target populations with disadvantages including disabilities, marginalized communities and lack of access to education.? The first Social Bond, “Banking on Women”, was launched in 2013 by the International Finance Corporation, which also issued a Social Bond on “Inclusive Business”.? While the market for Social Bonds has grown steadily, generally because of issuances by multinational organizations, it initially suffered from the lack of transparency and accountability and difficulties in defining and measuring social impact.? While steps have been taken to address these issues, notably the development of Social Bond Principles by the ICMA, larger investors still prefer financial gains and corporations have been relatively slow to use Social Bonds as financing instruments.[20]

The ICMA’s Social Bond Principles: Voluntary Process Guidelines for Issuing Social Bonds (“SBP”) are intended to promote integrity in the Social Bond Market through guidelines that recommend transparency, disclosure and reporting.? Like the GDP, the SBP are updated when necessary to reflect the development and growth of the global Social Bond market and the discussion below is based on the version of the SBP that went into effect as of June 2023.[21]? The SBP begin by defining Social Bonds as “any type of bond instrument where the proceeds, or an equivalent amount, will be exclusively applied to finance or re-finance in part or in full new and/or existing eligible Social Projects and which are aligned with the four core components of the SBP”.? The SBP recognize four types of Social Bonds, noting that additional types may emerge as the market develops[22]:

• Standard Social Use of Proceeds Bond: an unsecured debt obligation with full recourse-to-the-issuer only and aligned with the SBP
• Social Revenue Bond: a non-recourse-to-the-issuer debt obligation aligned with the SBP in which the credit exposure in the bond is to the pledged cash flows of the revenue streams, fees, taxes etc., and whose use of proceeds go to related or unrelated Social Project(s).
• Social Project Bond: a project bond for a single or multiple Social Project(s) for which the investor has direct exposure to the risk of the project(s) with or without potential recourse to the issuer, and that is aligned with the SBP.
• Secured Social Bond: a secured bond where the net proceeds will be exclusively applied to finance or refinance either: (i) the Social Project(s) securing the specific bond only (a “Secured Social Collateral Bond”); or (ii) the Social Project(s) of the issuer, originator or sponsor, where such Social Projects may or may not be securing the specific bond in whole or in part (a “Secured Social Standard Bond”).

The SBP explains that Social Projects directly aim to address or mitigate a specific social issue and/or seek to achieve positive social outcomes especially but not exclusively for a target population(s) and describes a “social issue” as an issue that threatens, hinders, or damages the well-being of society or a specific target population.? The SBP includes the following list of Social Project categories that seeks to capture the most used types of projects supported by or expected to be supported by the Social Bond market[23]:? ?

• Affordable basic infrastructure (e.g. clean drinking water, sewers, sanitation, transport, energy)
• Access to essential services (e.g. health, education and vocational training, healthcare, financing and financial services)
• Affordable housing
• Employment generation and programs designed to prevent and/or alleviate unemployment stemming from socioeconomic crises, climate transition projects and/or other considerations for a “just transition” (such provision and/or promotion could include SME financing and microfinance)
• Food security and sustainable food systems (e.g. physical, social, and economic access to safe, nutritious, and sufficient food that meets dietary needs and requirements; resilient agricultural practices; reduction of food loss and waste; and improved productivity of small-scale producers)
• Socioeconomic advancement and empowerment (e.g. equitable access to and control over assets, services, resources, and opportunities; equitable participation and integration into the market and society, including reduction of income inequality)

The SEP noted that examples of target populations include, but are not limited to, those that are:

• Living below the poverty line
• Excluded and/or marginalized populations and/or communities
• People with disabilities
• Migrants and/or displaced persons
• Undereducated
• Underserved, owing to a lack of quality access to essential goods and services
• Unemployed and/or workers affected by climate transition
• Women and/or sexual and gender minorities
• Aging populations and vulnerable youth
• Other vulnerable groups, including because of natural disasters, climate change, and/or climate transition projects that cause or exacerbate socioeconomic inequity

The four components of the SBP are as follows:

• Use of Proceeds: The SBP explains that the cornerstone of a Social Bond is utilization of the proceeds of the bond for Social Projects, which should be appropriately described in the legal documentation for the security.? The SBP requires that all designated Social Projects provide clear social benefits, which will be assessed and, where feasible, quantified by the issuer.
• Process for Project Evaluation and Selection: The issuer of a Social Bond should clearly communicate to investors: the social objectives; the process by which the issuer determines how the projects fit within the eligible Social Project categories identified above; and the related eligibility criteria, including, if applicable, exclusion criteria or any other process applied to identify and manage potentially material environmental and social risks associated with the projects.
• Management of Proceeds: The net proceeds of the Social Bond, or an amount equal to these net proceeds, should be credited to a sub-account, moved to a sub-portfolio or otherwise tracked by the issuer in an appropriate manner, and attested to by the issuer in a formal internal process linked to the issuer’s lending and investment operations for Social Projects.
• Reporting: Issuers should make, and keep, readily available up to date information on the use of proceeds to be renewed annually until full allocation, and on a timely basis in case of material developments. The annual report should include a list of the projects to which Social Bond proceeds have been allocated, as well as a brief description of the projects and the amounts allocated, and their expected impact.

As is the case with the GBPs, the SBP include a recommendation to issuers of Social Bonds that they seek advice from consultants and/or institutions with recognized expertise in social issues or other aspects of the issuance of a Social Bond and select and appoint external review providers to confirm the alignment of their Social Bond or bond program with the four components of the SBP.? The SBP also recommends public disclosure of external reviews that include disclosures of the credentials and relevant expertise of the external review provider and the scope of the review conducted.

Sustainability Bonds?

Sustainability Bonds encompass elements from both Green and Social Bonds and are used implement a combination of positive environmental and social impact and for both environmental and social projects in a variety of categories including food health and well-being, quality education, clean water and sanitation, affordable and clean energy.[24]? The Sustainability Bond Guidelines issued by the ICMA in June 2018 and last updated in June 2021 describe Sustainability Bonds as bonds where the proceeds will be exclusively applied to finance or re-finance a combination of both Green and Social Projects (as those terms are defined and explained in the GBP and the SBP), noting that a market has developed for bonds aligned with both the GBP and the SBP).[25]? Other influential principles or guidelines relating to the issuance of Sustainability Bonds include the GBP, SBP, the ICMA Blue Bond Practitioner’s Guide, the CBI Taxonomy, IFC Climate definitions, IFC Blue Finance Taxonomy, and the UN Global Compact Practical Guidance to Issue a Blue Bond.[26] ??

The ICMA explained that Sustainability Bonds are aligned with the four core components of both the GBP and the SBP (with the former being especially relevant to underlying Green Projects and the latter to underlying Social Projects) and that those common four core components of the GBP and the SBP and their recommendations on the use of external reviews and impact reporting also apply to Sustainability Bonds.? One form of Sustainability Bond is a Social Impact Bond which is based on a “pay-for-success model” enabled by public-private partnerships.? In a typical situation, a private sector investor provides funds to a local party that will be responsible for implementing a specific social project to achieve mutually agreed impact performance targets.? At the end of the project, its impacts are measured by an outside outcome evaluator and if the targets are achieved the investors will be paid by the local government as provided under the terms of the bond.?

Sustainability-Linked Bonds

In its Sustainability-Linked Bond Principles (“SLBP”) released in June 2020 and updated in June 2024 the ICMA describes Sustainability-Linked Bonds (“SLBs”) as any type of bond instrument for which the financial and/or structural characteristics can vary depending on whether the issuer achieves predefined Sustainability/ESG objectives which are measured through pre-defined Key Performance Indicators (“KPIs”) and assessed against pre-defined Sustainability Performance Targets (“SPTs”).[27]? The proceeds of SLBs are intended to be used for general purposes, thus the use of proceeds is not a determinant of its categorization; however, issuers can elect to combine the GBP/SBP approaches with their SLB.[28]? There are five core components to the SLBP:

• Selection of KPIs:? KPIs that can be external or internal; however, they must always be material to the issuer’s core sustainability and business strategy and address relevant ESG challenges of the industry that are under management’s control.? Specifically, KPIs should be relevant, core and material to the issuer’s overall business, and of high strategic significance to the issuer’s current and/or future operations; measurable or quantifiable on a consistent methodological basis; externally verifiable and able to be benchmarked using an external reference or definitions to facilitate the assessment of the SPT’s level of ambition.[29]
• Calibration of SPTs:? Issuers must calibrate and set in good faith one or more SPT(s) per KPI that represent their commitment to ambitious change and which represent a material improvement in the respective KPIs and be beyond a “Business as Usual” trajectory; where possible be compared to a benchmark or an external reference; be consistent with the issuers’ overall strategic sustainability/ESG strategy and be determined on a predefined timeline, set before (or concurrently with) the issuance of the bond.? The SLBP provides that target setting should be based on a combination of benchmarking approaches: the issuer’s own performance over time on the selected KPIs (a minimum of three years, where feasible, is recommended); relative positioning versus the performance of the issuers’ peers or versus current industry or sector standards; and/or reference to the science, official country/regional/international targets (e.g., Paris Agreement on Climate Change and net zero goals, Sustainable Development Goals (SDGs), etc.) or recognized Best-Available-Technologies.
• Bond Characteristics:? The SLB must describe when and how the bond’s financial and/or structural characteristics will vary based on whether or not the selected KPI(s) reach the predefined SPT(s).? The SLBP noted that potential variation of the coupon was the most common example of variation, but that it was also possible to consider the variation of other financial and/or structural characteristics of the SLB.
• Reporting: The SLBP call on issuers of SLBs to regularly publish (at least annually), and keep readily available and easily accessible, up-to-date information on the performance of the selected KPI(s), including baselines where relevant; a verification assurance report relative to the SPT outlining the performance against the SPTs and the related impact, and timing of such impact, on the bond’s financial and/or structural characteristics; and any information enabling investors to monitor the level of ambition of the SPTs (e.g., any update in the issuers sustainability strategy or on the related KPI/ESG governance, and more generally any information relevant to the analysis of the KPIs and SPTs).
• Verification: The SLBP requires issuers of SLBs to seek independent and external verification (e.g., limited or reasonable assurance) of their performance level against each SPT for each KPI by a qualified external reviewer with relevant expertise (e.g., auditor or an environmental consultant), at least once a year, and in any case for any date/period relevant for assessing the SPT performance leading to a potential adjustment of the SLB financial and/or structural characteristics, until after the last SPT trigger event of the bond has been reached.? Performance verifications should be made publicly available.

Disclosures regarding the processes used and assumptions underlying the KPIs and SPTs are obviously important.? The SLBP calls on issuers to communicate clearly to investors the rationale and process according to which the KPI(s) have been selected and how the KPI(s) fit into their sustainability strategy, and to provide clear definitions of the KPI(s) that include the applicable scope or perimeter (e.g., the percentage of the issuer’s total emissions to which the target is applicable) and the calculation methodology (e.g., clear definition of the denominator of intensity-based KPIs and definition of a baseline, where feasible, that is science-based or benchmarked against an industry standard).? With respect to calibrating and setting their SPTs, issuers are expected to disclose to investors any strategic information that may decisively impact the achievement of the SPTs and clearly refer to each of the following:

• The timelines for the target achievement, including the target observation date(s)/ period(s), the trigger event(s) and the frequency of SPTs
• Where relevant, the verified baseline or reference point selected for improvement of KPIs as well as the rationale for that baseline or reference point to be used (including date/period)
• Where relevant, in what situations recalculations or pro-forma adjustments of baselines will take place
• Where possible and taking competition and confidentiality considerations into account, how the issuer intends to reach such SPTs (e.g. by describing its ESG strategy, supporting ESG governance and investments, and its operating strategy (i.e., the types of actions that are expected to drive the issuer’s performance toward achievement of the SPTs))
• Any other key factors beyond the issuer’s direct control that may affect the achievement of the SPT(s)

The SLBP also encourages issuers to position the information outlined above within the context of their overarching objectives, strategy, policy and/or processes relating to ESG.[30]? Appendix II of the SLBP is a guiding, non-exhaustive checklist of elements that are recommended or required to be disclosed in the context of the issuance of an SLB with respect to selection of KPIs, calibration of SPTs, bond characteristics, reporting commitments, second party opinions and post-issuance reporting and verification.? The SLBP noted that disclosures may be included in bond documentation and, where appropriate, in a standalone document such as a framework, investor presentation, external review or on issuers’ website or annual sustainability or annual reports.

SDG Bonds

SDG bonds are fixed income instruments that allow investors to finance specific investment themes such as climate change, health, food, education, access to financial services and target specific SDGs through investing.[31]?SDG bonds support the financing of a combination of green and social (i.e., “sustainable development”) projects, programs, and activities in countries and regions all over the world.[32]? The most common structure for an SDG bond is a “UoP bond which funds a project with dedicated environmental and/or social benefits, such as climate change mitigation/adaptation, water, health, food or education.? Types of SDG bonds track the mainstream categories of green, blue, social, and sustainability bonds[33]:

• Green bonds: Underlying projects with environmental benefit (e.g., renewal energy, energy efficiency, Green building, clean transportation, agriculture, forestry, and waste) that may advance one or more of the following SDGs: Zero Hunger (SDG 2); Clean Water and Sanitation (SDG 6); Affordable and Clean Energy (SDG 7); Industry, Innovation and Infrastructure (SDG 9); Sustainable Cities and Communities (SDG 11); Responsible Consumption and Production (SDG 12); Climate Action (SDG 13); Life Below Water (SDG 14); and Life on Land (SDG 15).
• Blue bonds: A subset of green bonds that specifically finance projects or activities that are water-related (e.g., management and restoration of water ecosystems, such as oceans and rivers; sustainable fisheries; seafood processing/shipping; sustainable tourism; and sustainable water supply) that may advance on or more of the following SDGs: Clean Water and Sanitation (SDG 6); Sustainable Cities and Communities (SDG 11); Responsible Consumption and Production (SDG 12); Climate Action (SDG 13); and Life Below Water (SDG 14).
• Social bonds: Underlying projects with social benefit (e.g., food security, socio-economic advancement, affordable housing and access to essential services) that may advance on or more of the following SDGs: No Poverty (SDG 1); Zero Hunger (SDG 2); Good Health and Well-Being (SDG 3); Quality Education (SDG 4); Gender Equality (SDG 5); Clean Water and Sanitation (SDG 6); Decent Work and Economic Growth (SDG 8); Industry, Innovation and Infrastructure (SDG 9); Reduced Inequalities (SDG 10); and Sustainable Cities and Communities (SDG 11).
• Sustainability bonds:? Finance a combination of green, blue and social projects that may advance a combination of SDGs listed for green, blue and social bonds.

Categories eligible for financing by UoP SDG bonds are outlined in financing frameworks published by sovereign issuers and each category is linked to budgetary expenditures that provide tangible contributions to one or more SDGs.? The context and priorities for each sovereign issuer will obviously vary and while all but two of the SDGs (Peace, Justice and Strong Institutions (SDG 16) and Partnerships for the Goals (SDG 17)) have been include in sovereign financing frameworks, SDGs do not receive equal financing from SDG bonds.? In fact, research on allocations among developing country sovereigns indicates that the most popular SDG targets for SDG bonds have been No Poverty (SDG 1), Decent Work and Economic Growth (SDG 8) and Sustainable Cities and Communities (SDG 11).[34]?

This article is an excerpt from my recently updated chapter on Sustainable Finance. To learn even more, download my new book Sustainable Finance and Impact Investment: A Guide for Sustainable Entrepreneurs.

Notes

[1] Adapted from International Capital Market Association and S&P Global Ratings, as described in Sustainable Bond Issuance to Approach $1 Trillion In 2024, S&P Global Ratings (February 13, 2024), 4.

[2] Id.

[3] Id. at 8.

[4] Id. at 7-8.

[5] ICMA: About Us.

[6] Sustainable Bond Market Data (ICMA).

[7] Sustainable Bonds Insight 2024 (Environmental Finance).

[8] For discussion of the momentum around sustainable finance taxonomies, particularly in the EU (the EU Taxonomy for Sustainable Activities and country-specific initiatives) and Asia, see Developing Sustainable Finance Definitions and Taxonomies (OECD, 2020).? For discussion of the benefits of the EU sustainable finance framework, including the EU Taxonomy, to various participants in the sustainable finance ecosystem (i.e., corporates, credit institutions, investors, insurers and auditors) with respect to business strategy, transition planning, target-setting, finance and transactions, reporting, monitoring and assurance, see Platform on Sustainable Finance Report on a Compendium of Market Practices (January 2024) (the Platform on Sustainable Finance is an advisory body to the European Commission).

[9] Sustainable Bond Issuance to Approach $1 Trillion In 2024, S&P Global Ratings (February 13, 2024), 3.

[10] Id. at 1.

[11] Sustainable Finance (International Capital Markets Association) and ESG Bond Market Key topics and trends for 2019 and beyond – getting the harmony right, BBVA (July 23, 2019)

[12] The Meaning of Green, The Economist (September 19, 2020), 70.

[13] Guidance on Sovereign SDG Bonds for Countries and Investors (GISD Alliance), 15.

[14] Green Bond Principles: Voluntary Process Guidelines for Issuing Green Bonds June 2021 (with June 2022 Appendix 1) (Paris: International Capital Market Association, June 2022).?

[15] For further information on specific issuances and instruments, see the ICMA’s extensive database of Green, Social and Sustainability Bonds.

[16] Explanation on how each of the Green Project categories can be mapped to the five overriding environmental objectives is provided in Green Project Mapping (Paris: International Capital Market Association, June 2021).? In addition, reference should be made to Green and Social Bonds: A High-level Mapping to the Sustainable Development Goals (Paris: International Capital Market Association, June 2020) as a frame of reference for demonstrating how the GBPs compliment the UN Sustainable Development Goals (“SDGs”) and evaluating the financing objectives of a Green Bond or Green Bond Program against the SDGs.? For example, the GBP project category “climate change adaptation” compliments SDG 1 (No Poverty) with relevant indicators including the number of people provided access to clean energy as a result of the use of proceeds from the Green Bond.

[17] Guidance on Sovereign SDG Bonds for Countries and Investors (GISD Alliance), 14-15.

[18] Id. at 15.

[19] ESG Bond Market Key topics and trends for 2019 and beyond – getting the harmony right, BBVA (July 23, 2019).

[20] For additional information about Social Bonds and social impact investment generally, see The Social Bond market: towards a new asset class? 2018 (Impact Investment Lab, 2018) and Social Bonds (International Finance Corporation.

[21] Social Bond Principles: Voluntary Process Guidelines for Issuing Social Bonds (Paris: International Capital Market Association, June 2023).

[22] For further information on specific issuances and instruments, see the ICMA’s extensive database of Green, Social and Sustainability Bonds.

[23] The SBP noted that Social Projects include attempts to provide and/or promote the goals in one or more of the categories and all related and supporting expenditures such as research and development.? Reference should be made to Green and Social Bonds: A High-level Mapping to the Sustainable Development Goals (Paris: International Capital Market Association, June 2020) as a frame of reference for demonstrating how the SBPs compliment the SDGs and evaluating the financing objectives of a Social Bond or Social Bond Program against the SDGs.? For example, the SBP project categories “access to essential services”, “affordable housing” and “socioeconomic advancement and empowerment” compliment SDG 1 (No Poverty) with relevant indicators including number of products and services serving low-income groups and the number of people provided with access to financial services, including microfinance, because of the use of proceeds from the Social Bond.?

[24] Sustainable Finance (International Capital Markets Association) and ESG Bond Market Key topics and trends for 2019 and beyond – getting the harmony right, BBVA (July 23, 2019).

[25] Sustainability Bond Guidelines (Paris: International Capital Market Association, June 2021).

[26] Guidance on Sovereign SDG Bonds for Countries and Investors (GISD Alliance), 15.

[27] The discussion of the SLBP and SLBs in this section is adapted from Sustainability-Linked Bond Principles: Voluntary Process Guidelines (Paris: International Capital Market Association, June 2024).

[28] The SLBP noted that SLBs should not be confused with Sustainability Bonds, which require that the Use of Proceeds conform to the Sustainability Bond Guidelines.

[29] The SLBP encourages issuers, when possible, to select KPI(s) that they have already included in their previous annual reports, sustainability reports or other non-financial reporting disclosures to allow investors to evaluate historical performance of the KPIs selected.? When KPIs that have not been previously disclosed are used, issuers should, to the extent possible, provide historical externally verified KPI values covering at least the previous three years.

[30] The SLBP recommend that, in connection with the issuance of an SLB, issuers appoint (an) external review provider(s) to confirm the alignment of their bond with the five core components of the SLBP (e.g., a Second Party Opinion) and that external reviewers assess the relevance, robustness and reliability of selected KPIs, the rationale and level of ambition of the proposed SPTs, the relevance and reliability of selected benchmarks and baselines and the credibility of the strategy outlined to achieve them, based on scenario analyses, where relevant.

[31] Thematic Bond (Green, Blue, SDG, Islamic Bonds) Frameworks | SDG Finance.

[32] Sustainable Development Bonds (World Bank).

[33] Guidance on Sovereign SDG Bonds for Countries and Investors (GISD Alliance), 14 and 16.

[34] Id. at 16-17.